How many of their 400M+ users are already Facebook users, do you think?

The market and the analysts –perhaps even you -- appear to be treating this number as 0%.

It's possible that every WhatsApp user is a Facebook user but Facebook has 1.2b users so 750m Facebook users can't already be WhatsApp users. This means there's room to grow the subscription revenue.

Also, the crossover doesn't matter as far as the current subscription revenue goes. 450m users still means $450m per year in revenue. While that would take a while to recoup $19b if it doesn't grow, there's not really a time limit on how long Facebook or WhatsApp will be around.

The success of this move really depends on how users react to it and if they start dropping the app in large numbers.

As talks between Facebook and WhatsApp began to draw to a close, Google Chief Executive Larry Page made a last-ditch effort to block the deal, and was even willing to outdo the $19 billion agreement the messaging app eventually reached with Facebook.

"We HAVE to get all that user data and we CANNOT allow others to have it!", Eric & Larry yelled in unison.

It's possible that every WhatsApp user is a Facebook user but Facebook has 1.2b users so 750m Facebook users can't already be WhatsApp users. This means there's room to grow the subscription revenue.

Also, the crossover doesn't matter as far as the current subscription revenue goes. 450m users still means $450m per year in revenue. While that would take a while to recoup $19b if it doesn't grow, there's not really a time limit on how long Facebook or WhatsApp will be around.

The success of this move really depends on how users react to it and if they start dropping the app in large numbers.

I honestly mean no offense, and I hope you’ll take it in the spirit of the discussion, but I feel compelled to point out that these are the kinds of rationales that end up justifying a $170B in market cap for a $7B in revenue company like Facebook, a $16+B purchase price for a $450M revenue company like WhatsApp, and $4B in purchase price for a zero-revenue company like Snapchat.

‘Revenue’, and even worse, ‘revenue-per-user.’

Companies are worth their expected future cash flows discounted at the appropriate risk-adjusted cost of capital, including all future growth prospects, no more no less. That is not rocket science or some academic pie-in-the-sky, but simple fact.

If Facebook gets to double-count every time it ‘acquires’ a user that it already has, I guess it won’t be too long before it becomes a trillion-dollar company. What a fabulous con game. Or value alchemy.

FB is already being valued by the market for all the potential cash flows it brings. This is, of course, primarily based on advertising, which, in turn, is based on the lifestyle and consumption habits of its current users, including whether they consume products from the likes of whether it's P&G, Apple, McDonalds, Walmart, Snapchat, or WhatsApp. And their demographic and socio-economic characteristics. All that, and perhaps much more, given that each FB user is currently valued – I am guessing incredibly overvalued – at $126 per user. So it matters a whole heck of a lot whether this acquisition is bringing with it 10M net new users or 460M.

I could conceivably buy an argument for why each new incremental user in this acquisition may be worth $35, although even that is a stretch. But we don’t know that number. Yet. At least, I have not seen it reported. We will get an idea when FB reports its next quarterly earnings. I am guessing that it’s going to be that’s far less than 460M.

Now the issue of $460M in revenues (assuming each user currently pays $1 per year for the app). At the end of the day, companies are not valued for revenues or even revenue-per-user, but for their cash flows from their ability to monetize every user via whatever their business model is (advertising, subscription revenue, fees for corporate data mining).

Let’s generously assume that WhatsApp will have FB’s margins as a stable business: that’s ~30%, or $138M per year. I won’t bore you with the details, but suffice it to say that under the most generous assumptions about future growth rates, risk-adjusted discount rates, reinvestment rates (after all, future cash flows don’t come free), etc., this is worth somewhere between ~$1B and ~$3B. That’s a far cry from $16+B. Justifying the latter price will require unbelievably high growth rates, achieved at essentially zero reinvestment, with a discount rate that is equal to the risk-free rate of interest.

I honestly mean no offense, and I hope you’ll take it in the spirit of the discussion, but I feel compelled to point out that these are the kinds of rationales that end up justifying a $170B in market cap for a $7B in revenue company like Facebook, a $16+B purchase price for a $450M revenue company like WhatsApp, and $4B in purchase price for a zero-revenue company like Snapchat.

Huh?

All I meant was that Facebook earn money from users on Facebook and now from users on WhatsApp. Whether users have an account on both doesn't really matter, Facebook now earn both ways.

Apple sell a lot of iPhones to people who have Macs, but it's still two different chunks of profit on Apple's books, and they're happy with one, the other, or both (obviously they prefer both).

Don't follow how you got to that comment to be leading to a false valuation. I wasn't commenting on the valuation at all anyway.

Perhaps I've misunderstood; why do you think it matters how many of WhatsApp's users already have a Facebook account?

You talk about double counting people, but who cares, it's profit that matters to the health of a company, and they won't be double counting that; if a user earns them $15 from a Facebook account and $10 from a WhatsApp account then they earn $25 altogether, but for all intents and purposes those are two entirely different chunks of profit, and it makes no difference if they were from different users.

I always feel like an idiot when I read about these massive buyouts because I honestly can't comprehend exactly what about WhatsApp is worth even $1 billion, much less $16 or $19 billion.
Such a large purchase price and a competition for it by two of the most well known internet-based companies today makes that news I want to hear about even though I have never had nor expect to have any interest in the app itself.

Yeah... as one of local radio jocks said (and he was probably not the first one): "What's wrong with Mark Zuckerberg, does he not know he can download it from AppStore for free..?"

I didn't really understand real value of FB either. It felt fake, over-inflated, artificial. And now, Mark is using some of his artificial worth to buy another over-inflated value. Kind of makes sense.

Tech Bubble 2.0 is in full effect. Spend money now boys, because your stock is going to crash in the next 18 months when everyone figures out that you don't have a product, you don't have adequate revenue, and you sure as hell don't have a P/E ratio that makes institutional investors' socks roll up and down after the honeymoon is over.

Today's $billion stock swaps are tomorrow's $billion write-downs. Enjoy it while you can.

You talk about double counting people, but who cares, it's profit that matters to the health of a company, and they won't be double counting that; if a user earns them $15 from a Facebook account and $10 from a WhatsApp account then they earn $25 altogether, but for all intents and purposes those are two entirely different chunks of profit, and it makes no difference if they were from different users.

Don't get your point.

Here's the only point: from what I've read, their revenue (not cash flows, not profits) in 2013 were $20M. Not even close to the $460M I assumed for the sake of making a point.

Join the club. I just can't see the math working here to justify such the huge price tag. Many of my friends overseas use WhatsApp, even though I never heard of it until recently. The ironic part is that my European friends all use iPhones. So when I was there and they were trying to convince me to use WhatsApp, I turned the table around on them and showed them what iMessage, FaceTime Audio does. They were in complete awe as to their iPhone having that native ability. To them, it's all about apps.

Most people are ignorant about what their iPhones can do. I must have spent an hour with them going through all the iOS7 stuff and general concepts.

They all jettisoned WhatsApp after that.

I like WhatsApp mantra of charging $.99 cents to use it, be add-free, and they seem to be very good about privacy. It's great for developing countries like India that have very expensive phone plans and use very cheap junk Android phones.

I'm in this area of thinking too. Then mentality of these people throwing so much money into these black holes just reeks of adolescents with money-management problems. They have so much of it right now, and they became so rich at so young an age, they don't have the mental maturity to stop for a moment and think long-term about deals like this and whether there's value for the money.

I think $16B is an absolute waste of money considering how much WhatsApp is making right now. I read an article that the founder said they made about $20m last year and that's their first profit I think. The math just doesn't add up.

Interesting story about your European friends. Sounds like a typical story Europeans will tell about Americans. Ignorance can be a blessing. Mostly these stories are half-true at best. As a European living in the US I would say that WhatsApp gets more usage in Europe for good reasons. First of all the iPhone has a much lower market share in all European countries compared to the US. Android and even Windows Phone are pretty successful over there. So if someone like myself wants to be able to text all my european friends, an app like WhatsApp is way better suited than Apples iMessage. Messenger would be an alternative but facebook penetration is lower than in the us and people are more readily inclined to join whatsApp than FB. Heck, even my mom - a total technological illiterate - and her friends use WhatsApp for personal communication. Secondly, cross-border text messages are extremely expansive in Europe and are used regularly. Because of that WhatsApp has replaced carrier text and picture messaging to a huge degree in many European countries. The service offers true value to customers as they save a lot of Euros using it. That can potentially be monetized in the future.

Still, the price is crazy high. But not compared to other internet companies. Twitter would cost twice as much if bought today, isn't profitable, has half the users and growth at a tenth of whatsApps pace. Amazon is a retailer selling stuff at miniscule margins. Yet nobody cares about its huge price tag. The difference with internet companies is that they can reach previously unimaginable numbers of people at a fraction of the cost of traditional companies. WhatsApp has built a service used by 450 million with 50 employees. As can be seen at FB once a social network achieves a profit, the margin expands rapidly with the companies revenue.

Can it? My observations from internet forums would indicate that ignorance creates very angry people. Perhaps it's because they are at least aware that the rest of the world keeps pointing out their ignorance but aren't aware at why the world thinks they are so clueless or how to rectify it.Edited by SolipsismX - 2/20/14 at 9:01pm

This bot has been removed from circulation due to a malfunctioning morality chip.

I fear, your math is flawed here. I have been using WhatsApp for over two years (maybe a couple of times a month) and haven't paid a dime. Same goes for most of my friends. I don't think they charge everybody after a year yet. So the 20 million Dollars in revenue do not equate to the number of users.

What I can assure you of is that I know more people in Europe who use or used to use WhatsApp compared to Facebook. Compare it to Twitter its not even a contest. The most extensive users of Twitter seem to be companies and the PR departments. Though to be fair. Those using Facebook tend to spend way more time with it than WhatsApp users. There also seems to be a fair amount of younger people moving away from WhatsApp to other services. With older people I am not so sure. And the fact that older Europeans use the service is actually a good sign because subscriptions most likely can be sold more often and with a higher price tag to them compared to teenagers who will just move on to the next best thing, once they are supposed to spend money on something.

You can't simply reverse engineer user awareness and mindshare. They're paying for what it has, not what it is (in code and staff).

What they have bought is a fickle base of reactionary nerds who dump and move onto the next anti-facebook or anti-whatever conglomerate when it swallows up their favorite SMS addiction app.

If Facebook is willing to concede roughly 33% of Facebook accounts are bogus they only have roughly 833 million users, most of whom are 30+ connecting with their families and wasting time passing recipes back n' forth, coordinating with their social clubs, etc., but sure as hell aren't buying products with adverts like they want.

The vast majority of this WhatsApp [pun on Wasssuppppp?] is a bunch of 20 something dweebs who treat SMS like they're going to a RAVE they heard of from the 80s/90s eras.

WhatsApp is like Trillian for SMS, but since it's housed within a mobile OS they project asinine profit margins with Advertising.

YES: Dot.com 2.0 partial bubble is going to blow a hole in a few large Social Networking companies.

Zero benefit??? What is the benefit facetime users get if it cannot even be used across platforms? I am an iPhone user, but me and most people I know use Skype instead of Facetime. Not because it is better, but because non-Apple users can communicate with it, too. A non-universal messaging or videoconferences app is a non-starter.

Zero benefit??? What is the benefit facetime users get if it cannot even be used across platforms? I am an iPhone user, but me and most people I know use Skype instead of Facetime. Not because it is better, but because non-Apple users can communicate with it, too. A non-universal messaging or videoconferences app is a non-starter.

Sure, there is a benefit, but you can say that about a pile of manure. What is the benefit to Facebook and Google in the realm of $16 and $19 billion considering each already have their cross-platform messaging servers?

This bot has been removed from circulation due to a malfunctioning morality chip.

Agree, In addition to helping sell iPods Apple gets revenue from iTunes purchases so a Windows version made sense. iMessage or FaceTime for Android would be an expense for Apple with zero benefit.

It's more like maps; Apple adds value to iOS by including a native solution (this time for efficient cross platform communication, that is a must in large parts of the world).
The other plus is that it kills WhatsApp and makes Facebook throw away 16 billion dollar (like Google and Motorola).

I agree. Apple did that with iTunes and Windows & the iPad took off!
I don't know what is stopping them from expanding iMessage.

FaceTime would also be great to use with other phones, but I can see where Apple would have problems getting it to work on all of the possible configurations of Android.

What value would there be for Apple in an Android version of iMessage? This is a great feature exclusive to Apple hardware, it would be nothing but a drain on Apple's resources. At least with iTunes on Windows people occasionally buy things.

I never said WhatsApp were worth the price Facebook paid. Don't know why you assumed I thought that.

Now you're all over the map. So, what exactly is the 'separate monetization' opportunity for FB with WA users that you referred to earlier? What is the revenue -- leave alone, cash flow -- model you had in mind?

And, if that separate monetization were not a justification for the price paid, what exactly were you implying?

What value would there be for Apple in an Android version of iMessage? This is a great feature exclusive to Apple hardware, it would be nothing but a drain on Apple's resources. At least with iTunes on Windows people occasionally buy things.

Seems as tho nearly every company with a successful feature or product is accused of IP theft as some point. Apple 's iMessage has been sued over infringement of MTEL IP. (Patent 5,809,428) That's in addition to yet another VirnetX patent suit, a new one targeting iMessage.http://virnetx.com/virnetx-asserts-new-patent-in-apple-lawsuit/Edited by Gatorguy - 2/21/14 at 5:33am

You even have to wonder how broadly many of these patents are granted. iMessage started two years after WhatsApp. There is no patent theft. If courts see it differently, than that is that. But a lot of these patent suits - by and against Apple are squarely aim at hindering the competition or extracting money from them - whether there truly was a patent violation or not.

I don't know what is stopping them from expanding iMessage.
FaceTime would also be great to use with other phones, but I can see where Apple would have problems getting it to work on all of the possible configurations of Android.

I like iMessage and use it a lot to message my family, but I can't imagine that many Android users would install it. If Apple are really serious about pushing it, then they need to make all the apps, but I think their opportunity has probably passed now.

Quote:

Originally Posted by Richard Getz

How is this worth that kind of money, and how can Facebook not bring similar functionality for much, much, much less?

It makes Microsoft's purchase of Skype look really cheap in comparison and everyone thought that was expensive!

It's not about the functionality though, its about the users and them actually using the service. To question value you also have to look at how much the SMS market is worth, as a strong competitor to it, that's where its potential value is going to come from.

What value would there be for Apple in an Android version of iMessage? This is a great feature exclusive to Apple hardware, it would be nothing but a drain on Apple's resources. At least with iTunes on Windows people occasionally buy things. ...

I like iMessage and use it a lot to message my family, but I can't imagine that many Android users would install it. If Apple are really serious about pushing it, then they need to make all the apps, but I think their opportunity has probably passed now.
...

No, Android users will install iMessage for the same reasons iOS users installed WhatsApp . And note that WhatsApp is currently the only cross platform solution.

Zero benefit??? What is the benefit facetime users get if it cannot even be used across platforms? I am an iPhone user, but me and most people I know use Skype instead of Facetime. Not because it is better, but because non-Apple users can communicate with it, too. A non-universal messaging or videoconferences app is a non-starter.

Zero benefit for Apple. Why should Apple spend $$$ to subsidize free loaders (Android)? I tell me people if you want to get group messages, get an idevice or Mac. My brothers have idevices and most of my friends do as well.